Archive: May 2018

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California Supreme Court Provides Clarity to California’s Prompt Payment Exception
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The Tenth Circuit’s Prediction: New York State Likely to Follow Trend Recognizing Damages Caused by Subcontractor’s Faulty Work is a Covered “Occurrence”

California Supreme Court Provides Clarity to California’s Prompt Payment Exception

By Timothy L. Pierce and Heather L. Frisch

The California Supreme Court issued an opinion on May 14, 2018 in United Riggers & Erectors, Inc. v. Coast Iron & Steel Co. that resolves a split in authority regarding whether Civil Code Section 8814 excuses prompt payment of retention by an owner or prime contractor if a good faith dispute of any kind exists between the parties or only when there is a dispute over the work for which the retention is due. The Court held that a contractor is only entitled to withhold retention when there is a dispute arising out of the work on which the retention is based.

In United Riggers, the prime contractor, Coast Iron & Steel Co. (Coast Iron), entered into a contract with the owner, Universal Studios, and in turn subcontracted a portion of the work to United Riggers & Erectors (United Riggers). United Riggers submitted its final bill that included additional costs for increased expenses due to Coast Iron’s alleged mismanagement and outstanding change order requests. Coast Iron accepted the work completed by United Riggers, but disputed the additional costs. Coast Iron then used this dispute as justification to withhold the entire final payment, including the retention payment for the accepted work.

United Riggers filed suit against Coast Iron for, among other things, its failure to make prompt payment of the retention monies it had received from Universal according to California Civil Code Section 8814. Notably, by the time the bench trial took place, Coast Iron had paid the outstanding retention to United Riggers. This action did not moot the statutory claim because violation of the prompt payment statute can result in a monetary penalty and payment of attorney’s fees under Civil Code Section 8818.

Coast Iron argued that the Court should adopt the broad view of the statute held in Martin Brothers Construction, Inc. v. Thompson Pacific Construction (2009) that held any bona fide dispute between the parties can justify the withholding of retention. In particular, Coast Iron pointed out the lack of any express limit on the nature of the dispute contained in the Section 8814 exception. On the other hand, United Riggers argued for the narrow interpretation of Section 8814 held in East West Bank v. Rio School District (2015) which restricts justification for withholding retention payments to disputes related to the security purpose of retention. East West Bank highlighted the underlying purpose of the prompt payment statutes was “to ensure timely payment of the retention as soon as its narrow justifications have been served.”

The Court considered the legislative history of Section 8814 and held that its narrow interpretation of the prompt payment statute aligns with the statute’s underlying purpose to ensure timely payment of undisputed amounts to contractors while still allowing the retention to fulfill its security purpose. Retention may be withheld when: (1) the subcontractor’s construction-related performance is the subject of a good faith dispute, (2) the liens or other demands from third parties expose the direct contractor to double payment, or (3) when payment would result in the subcontractor receiving more than the minimum amount both sides agree is due. Under United Riggers, withholding retention is not justified because of a dispute whether additional amounts beyond the retention might be owed such as pending requests for change orders.

The Tenth Circuit’s Prediction: New York State Likely to Follow Trend Recognizing Damages Caused by Subcontractor’s Faulty Work is a Covered “Occurrence”

By Frederic J. Giordano, Stephanie S. Gomez                     

The United States Court of Appeals, Tenth Circuit recently issued a favorable decision for policyholders finding property damage arising from a subcontractor’s faulty work arose from an accidental “occurrence” under New York law.  In Black & Veatch Corp. v. Aspen Ins. (UK) Ltd,[1] a 2–1 Tenth Circuit panel agreed with Black & Veatch Corp. (“B&V”) that its excess policy — which contained a New York choice-of-law provision — covered claims for property damage to a third party caused by its subcontractor’s faulty work.[2]  The Tenth Circuit reversed the district court’s ruling that B&V’s subcontractor’s faulty work caused damage to only B&V’s own work and, therefore, was not a covered “occurrence.”[3]  The Tenth Circuit concluded the New York Court of Appeals would likely find the subcontractor’s faulty work was an accidental “occurrence,” following the growing trend of other state high courts that have addressed this coverage issue under commercial general liability (“CGL”) polices.[4]  Policyholders — whose policies are governed by New York law — should take notice and consider the implications of this decision on whether New York will soon join the majority view that faulty workmanship by a subcontractor can be an occurrence under CGL policies.

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